PdVSA plans to honor 8.5% 2020 payments as short-term debt obligations pile up

29 August 2018
 

Petroleos de Venezuela (PdVSA) is planning to honor approaching principal and interest payments on senior secured USD 2.5bn 8.5% 2020 bonds, even as the cash-strapped Venezuela state-owned oil company faces mounting short-term debt obligations, a source at PdVSA and a source familiar with the matter told Debtwire.
 
PdVSA must pay USD 840m in principal and USD 107m in interest on 27 October, and also has USD 500m due to ConocoPhillips, within 90 days from the signing of the International Chamber of Commerce (ICC) award settlement agreement announced 20 August. PdVSA must also post a so-called supersedeas bond for USD 1.4bn in its legal fight against Canadian gold miner Crystallex International Corp to avoid the enforcement the 9 August writ of attachment order of PDV Holding shares.
 
The source at PdVSA declined to comment on funding sources for the October payments, and reiterated PdVSA’s efforts to avoid the risk of bondholder enforcement of rights to Citgo Holding shares pledged to guarantee the 2020 bonds. PDVH is the parent of US-based Citgo Holding, which in turn holds the shares of PdVSA’s most valuable asset, Citgo Petroleum Corporation.
 
The risk of bondholder enforcement increased after OFAC’s 19 July issuance of Venezuela General License 5 allowing bondholders to gain access to their collateral and enforce their rights, in a sharp reversal to the 21 May executive order which prohibited US persons from being involved in the transfer by the government of Venezuela of any equity stake in any entity owned 50% or more by the government.
 
Many believe a 8.5% 2020 bond default is likely because PdVSA will make the affirmative decision to miss the USD 840m amortization payment, either strategically or because it does not have the cash on hand or ConocoPhillips would successfully confirm its USD 2bn arbitral award, Cleary Gottlieb wrote in a 6 August paper.
 
Per the 2020 bonds’ indenture, either of these events alone would constitute an event of default.
 
“Risk for non-payment is higher after the Crystallex ruling,” a third source said. “I still like the 2020s, the price is stable, and there is still enough collateral for investors to break even in the event of non-payment.” The 8.5% 2020 bond traded today at 85.75 to yield 16.612%, according to MarketAxess.
 
From the Venezuela government’s point of view, the cost of keeping 50% of Citgo by paying the remaining amortization of the USD 2.5bn plus interest is clearly too high in comparison with the limited benefits, Deutsche Bank wrote in a 24 August report. Approximately 50.1% of Citgo Holding shares are pledged to guarantee 2020 bonds and 49.9% are pledged to Rosneft Trading.
 
“The Crystallex ruling would only add to the disincentives for the government to make the payment. If the ruling becomes final, and if a settlement is not reached, then PdVSA would lose Citgo even if it makes the balance of the 2020s in the next three years,” Deutsche wrote.
 
PdVSA settlement efforts
 
Recent actions taken by PdVSA tell a different story, however. On 20 August, PdVSA ConocoPhillips reached a settlement agreement regarding the USD 2bn ICC arbitration award. Once it makes the initial USD 500m payment, the balance of its settlement is expected to be paid quarterly over a period of 4.5 years.
 
Crystallex and Venezuela were rumored to be in the middle of fresh negotiations for a settlement agreement when the US district court in Delaware granted Crystallex's request for a writ of attachment fieri facias, in its case against PdVSA, the source familiar and a Caracas-based lawyer said.
 
“Crystallex’s local counsel in Venezuela was surprised by the Delaware ruling,” the source familiar said. “They had been discussing terms of the settlement – and contemplating some kind of haircut, but after the Delaware decision, this might accelerate some kind of deal.”
 
A lawyer for Crystallex declined to comment on whether new negotiations with Venezuela took place or are ongoing.
 
The Delaware court has since issued a memorandum decision directing the clerk’s office to issue and serve the writ of attachment. That order also provides a schedule for additional motions or briefing prior to execution of the writ. Crystallex believes the sale of the PDVH shares “may serve to fully satisfy” Venezuela’s debt to Crystallex, and recently asked the court to stay request that recent actions remain stayed pending the execution sale process in the enforcement proceeding, Crystallex lawyers said in a 24 August letter to Judge Leonard P. Stark.
 
Meanwhile, PdVSA filed a petition earlier this week in the US Court of Appeals for the Third Circuit, requesting an order to direct a Delaware district court to vacate a 23 August order authorizing the attachment of PDV Holding shares.
 
Crystallex’s gains do not derive from the value from the public sale of the PDV Holding collateral, which, is close to zero, the investment bank and broker dealer Torino Capital wrote in a 13 August report.
 
Crystallex will derive value from its ability to make PdVSA lose the collateral, Torino said in the note. And to the extent that PdVSA places some value on the loss of the collateral, it may decide it is in its interest to reach a settlement with Crystallex in the expropriation case.
 
“Since the value of the collateral to Crystallex is so low, it is probable that the firm can be convinced to settle the case for much less than the total USD 1.2bn plus interest value of the award,” Torino wrote.
 
Under terms of the parties’ previous settlement agreement, Venezuela committed to pay Crystallex USD 25m by 30 November 2017. Venezuela also agreed to pay another USD 15m by 31 December and approximately USD 400m by late 2020, having also agreed to additional payments that were not disclosed.
 
by Mariana Santibanez